Characteristics of Insurance

The Independent Financial Portal Financial Web reports that though all contracts have certain basic elements, insurance contracts usually have certain characteristics that are not usually found in other kinds of contractual agreements. Some of the most notable characteristics of insurance contracts are that they are unilateral, personal contracts that require utmost good faith and have an associated parol evidence rule and aleatory.

In a unilateral contract, an insured person pays the insurance policy premium. The insurance company makes a promise to reimburse this insured person for any kinds of covered losses that might happen in the future. Once the insured person has paid the insurance policy premium, nothing else is necessary on his part. The insurance company is the only party that can be held liable for a breach of contract in a unilateral agreement.

Insurance contracts are generally personal agreements between an insurance company and the individual it insures. Insurance contracts are not transferable to other people without the consent of the insured person (though some maritime and life insurance policies are exceptions to this).

Though all contracts should ideally be carried out in good faith, people hold insurance contracts to an even higher quality standard. Each party requires and is legally entitled to count on the declarations and representations of each party in an insurance agreement. This means all parties involved in an insurance contract must possess a reasonable expectation that other parties are not trying to defraud, mislead or conceal information. In utmost good faith insurance contracts, all parties must reveal all the material information they possess. Material information includes any information that could easily influence a party’s choice of whether to enter into an insurance contract. If this data is not disclosed, other parties normally have a right to void the agreement.

This principle limits the effects that oral statements made prior to the execution of an insurance contract can have. The assumption of this rule is that any oral agreements made prior to when the contract was written were automatically incorporated into the writing of the contract. Once a contract is executed, oral statements made before this occurred will not be allowed to counter or alter the contract in any way in a court of law.

If one party can receive a notably higher amount than he gives up under a certain agreement, this contract is called aleatory. Insurance contracts are of this nature because the insured (or his beneficiaries) can potentially receive quite a bit more in claim proceeds than he paid the insurance company in premiums. On the other hand, the insurance company could also receive significantly more money than the insured person if an insurance claim never gets filed.